Question
23. Virginia Tech is negotiating with the mayor of Kolkata to start a manufacturing plant in an abandoned building. The cash flows for Virginia's
23. Virginia Tech is negotiating with the mayor of Kolkata to start a manufacturing plant in an abandoned building. The cash flows for Virginia's proposed plant are shown in Table E5.25: TABLE ES.25 Year Year! Year 2 Year 3 Year 4 -Ps R R 1000.000 3.70.000 165,000 1,70,000 1.75,000 The city has agreed to subsidize Virginia. In preliminary discussions, Virginia suggested four alternatives 10 Subsidize the project to bring its IRR to 24% (8) Subsidize the project to provide a 2-year payback (i) Subsidize the project to provide NPV of Rs 70,000 when cash flows are discounted at 18% (iv) Subsidize the project to provide ARR of 40% You have been hired by Kolkata city to recommend a subsidy that minimizes costs to the city. Please indicate how much of a subsidy you would recom- mend for each year under each alternative suggested by Virginia. Which of the four subsidized plants would you recommend to the city if the appropriate discount rate is 18% 7
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